Neogen Corporation
Q4 2021 Earnings Call Transcript

Published: 20 Jul 2021

[Operator:]

Good day and welcome to the Neogen Fiscal Year 2021 Year-End Earnings Results Conference call. All participants will be in a listen-only mode. I would now like to turn the conference over to John Adent, President and Chief Executive Officer. Please go ahead, sir.

[John Adent:]

Thank you, Chuck. Good morning everyone and welcome to our regular quarterly conference call for investors and analysts. Today, we'll be reporting on our fourth quarter and our full 2021 fiscal year, which ended May 31. As usual, some of the statements made here today could be termed as forward-looking statements. These statements are subject to certain risks and uncertainties, and our actual results may differ from those that we discuss today. The risks associated with our business are covered in part in the company's Form 10-K as filed with the Securities and Exchange Commission.

[Steve Quinlan:]

Well, thanks, John and good morning to everyone on the call today. Before I start with the numbers, I'd like to echo John's comments on just how proud we are of the quarter we're reporting on today. It was a very difficult year due to the pandemic, but our entire team pulled together and did an outstanding job working through the challenges. While we're seeing some loosening of restrictions, we're not yet through with these challenges. We still have many individuals working remotely and are experiencing some adverse effects of supply chain and workforce shortages. But as markets are opening up, our sales team is starting to increase their business travel, and we're working towards getting back to our normal operating conditions. Earlier today, we issued a press release, announcing the results of our fourth quarter and full year, which ended on May 31st. Revenues for the fourth quarter were $127.4 million compared to $109.1 million in the same quarter a year ago, and that's an increased 17%. For the full year, revenues were $468.5 million, a 12% increase over last year's $418.2 million. Net income for the quarter was $15.8 million or $0.15 a share compared to $16.3 million a year ago, also $0.15 a share. Full year net income for fiscal 2021 was $60.9 million or $0.57 a share compared to $59.5 million or $0.56 a share for fiscal 2020. You'll remember we announced a two-for-one stock split effective June 4th, and these per share amounts have been adjusted to reflect this.

[John Adent:]

Thanks Steve. Steve's right. There's a lot of different variables affecting our numbers for this quarter and the year. And we recognize that this has been an unusual year and we're actively managing the effects of the pandemic and what those effects have been on Neogen. Like so many others around the world, Neogen has been dealing with supply chain issues due to the pandemic. Steve mentioned this, but we've seen our costs, both inbound and outbound freight increased tremendously, in some cases tripling. And we've been dealing with the impacts on our margin and earnings all year. Steve talked about the actions that we're taking to help curb those costs going forward. So, we feel pretty confident. We're going to get those back into control. Steve went through this in a lot of detail, but I think it's worth talking about some more. Comparing our performance last year's fourth quarter is difficult. In the last year at this time, we were just -- the world was just entering a lockdown and we were unsure as to how the global pandemic would impact our business. So, as Steve talked about, we implemented a number of cost-saving -- really aggressive cost-saving measures. We reduced or eliminated pay of our senior management. We furlough to reduce the hours of approximate 5% of our U.S. workforce. We cut discretionary spending and we halted all business travel and that saved us nearly $2 million in the quarter of last year. We then quickly find opportunities to support customers around the world in protecting the facilities and staff with opportunistic sales of gloves, sanitizers, and disinfectants of over $4.5 million. Now that being said, we feel well-prepared to handle these variables. And I'm extremely optimistic about the business as we move into our new year. This July, we're going to be fully integrating Megazyme into the U.S. and sales and marketing teams. We've already seen a tremendous amount of excitement from our customers regarding the products offered by Megazyme. And we look forward to carrying these -- that excitement into the marketplace and offering these new solutions. Our Animal Safety segment had a strong recovery year on the strength of animal care products, veterinary instruments, and biosecurity products. We received EPA approval for the U.S. distribution Neogen Viroxide Super and launched it domestically at the World Pork Expo in June. Demand continues to be strong for rodent control products across the U.S. as we move into fiscal 2022, and I look forward to seeing continued growth with this segment and then the next fiscal year. We're seeing our forensic toxicology sampling -- samples beginning to increase as we expecting -- as we are expecting the industry to bounce back after the COVID-19 shutdowns of workplaces and racetracks. Our worldwide Genomics offering continues to grow, reaching new markets and new customers. We're really excited about the growth we've seen in the agriculture sector. On June 24th, we announced the expansion of our partnership with the Center for Aquaculture Technologies, a leader in the field of genetic improvement for aquatic species, which continues to open doors for us to work with aquatic breeders, to help make more informed breeding decisions and ensure sustainable farming. We've also seen our companion animal genomic services continue to be strong. Our canine parentage test remains the most common test, none in the United States and used by the American Kennel Club and our sales of that product, as Steve mentioned, more than doubled in Australia. We also see tremendous potential in the new Igenity Canine Wellness test, which we launched in December of 2020. This test is veterinarians. The opportunity to screen for predisposed risk factors so they can make informed recommendations on diet and exercise, as well as screen for possible health concerns. In May, we launched our new AccuPoint NG ATP sanitation monitoring system, which has been redesigned to be more user-friendly or offering the fastest, most precise and easy to monitor testing data. We feel confident that this new system will continue to gain market acceptance within the food, beverage and healthcare industries in fiscal 2022. This last year we began offering our new Neogen Analytics food safety risk management Software-as-a-Service. The service delivers the most comprehensive environmental monitoring program automation solutions for food companies and is compatible with innovation -- innovative technologies like our new AccuPoint NG and ANSR systems where the users can implement systems and increase the bill of business -- the visibility of food testing and results, reducing risk and elevating food safety standards. In Q4, we quadrupled the number of sites using the Neogen Analytics, and we have a strong customer demand and we'll continue new placements throughout fiscal year 2022. We also recently received AOAC approval for our Soleris Direct Yeast and Mold test for use in cannabis, allowing us to provide a valuable service to the growing cannabis industry, offering safe and secure options from potentially harmful microorganisms. Yeah, I agree with Steve. I was very proud of our Neogen team members for how they were able to tackle a very challenging year head on and doing it by leading through new products and acquisitions, continuing to grow our market share and giving our customer solution to make their jobs easier and the global food supply safer. Our entire team has done a great job of adapting to the changing business landscape and working hard in order to give us this positive momentum going into the next fiscal year. We have several new product and service offerings preparing to launch that will help our customers protect the people and animals they care about. I am really excited about our continued growth and expect a strong fiscal 2022 year. I'll now open it up for any questions that you may have.

[Operator:]

We will now begin the question-and-answer session. And the first question will come from David Westenberg with Guggenheim Securities. Please go ahead.

[David Westenberg:]

Hi. Thank you for taking the question and congrats on a great year. And appreciate all the color in terms of the margin, that was a lot of very good commentary and helpful and I'm happy to hear everyone gets their -- got their salaries back. So, can you quantify some of the shipping costs, that might've occurred in the quarter and when they're expecting to roll off? And then just kind of on a ballpark on a go-forward gross margins maybe for this year and the year -- in the year next, because there's been obviously a lot of funkiness in this last year, whether it be like the shipping costs. And then I guess the prior year, you had some opportunistic sales, traditionally I think Neogen is like this 47-ish gross margin company is, that kind of the still the way to think about it?

[John Adent:]

Yeah. Dave, I will let Steve comment directly on shipping -- that's all right. I'll let Dave -- I'll let Steve comment on the shipping and then I'll follow-up with the rest.

[Steve Quinlan:]

Yeah. David, I would say that in the fourth quarter, the incremental freight impact was about $700,000 on us. That was more than the volume increase. And then going to your question about, the -- what we see as our margin profile going forward, I think you're probably on that 47% is probably about right. I think that's an achievable target for 2022 and obviously as you know, a lot of it depends on product mix and just how that rolls out and going. You also asked about what we see in terms of freight for next year. All the reports that we read and people we talk to are that the freight supply demand imbalances are going to continue into 2022. So John, I don’t know, you have more to add.

[John Adent:]

Yeah. And I think, Steve mentioned some of the things we're doing about it, David, right, is we're going to make sure that we're doing full truck loads, full container loads, planning, looking at ways that we can be more efficient. We're looking also at -- these costs are coming through. So, our customers know these costs are coming through, so they're expecting price increases and we don't want to disappoint them. So, we'll see some of that happened within the year, right? And so, you're going to see an opportunity for us to improve margins that way. And I agree with Steve, I think, that baseline that you're looking at is not unrealistic and we know that there's upside opportunity there.

[David Westenberg:]

Perfect. And then just a quick -- one quick one on the JBS plant shutdown in -- due to the cyber attack in Brazil, did that have any impact on you? I realize that you have a lot of customers and maybe one customer doesn't do anything, but just wondering if that might've done anything.

[John Adent:]

It was nothing material for us. I mean, it's something to watch across all others. I mean, the thing I'm really watching more, David, is the -- two confirmed cases of African swine fever and a commercial herd in Germany that came out last week. I think that could be a much bigger impact. So, I think, we continue to look for what's going on around the world and find ways to -- as Steve mentioned, we did the opportunistic sales last year and we'll find a way to fill that gap, but new opportunities this year, because that's what we do.

[David Westenberg:]

Got it. And I'll just ask one more before hopping back in queue. Just can you talk about acquisition priorities if you have them in terms of Animal versus Food Safety, if you're looking at more value or growth or international or domestic? And I'm guessing the answer is everything, but if you maybe could rank order a little bit to give us kind of a framework and how you might be looking at it and go forward, that'd be great. And I'll hop back in queue after that.

[John Adent:]

Yeah. No. We've got a very -- I think a very good plan on the way that we evaluate our acquisitions. I mean, we've identified the markets we want to be in and any ancillary markets that we feel are important and Megazyme is a great example of that. I mean, you wouldn't think about Megazyme, does it fit -- well, we consider true food safety. It's more food analytics. And -- but it really is a excellent fit for our business, because it's the same customer type and allows us to increase our products and pipeline to that same customer. And I like to think about it is it gives us the other side of the consumer package box. On one side, we're talking about it's allergen free. It's not free, it's gluten free. And on the other side, we're talking about how much dietary fiber it has, how many polysaccharide, what are those other measurements that are important for consumers? So, it's really a nice expansion for our business. So, we've done a really nice job of looking at the markets we want to be in and then the regions we want to be in, because I think we're underrepresented in some regions. We have a lot of opportunity worldwide to continue to grow. And I think Australia is a great example. You look at what we did four years ago in Australia when we bought the Genomics business there. And then we added -- we brought in our Animal Safety products and we added the Food Safety distributor. And man, look at that business is just growing like crazy and they're doing a great job. So, we see that model. We like that model. I think that when I look at it and as a team what we've talked about is, our priorities really are around growth and our bigger growth markets, our Food Safety and Genomics. And I think those are two key areas that when we say, if we had our preference and we had three equally accretive businesses, we're going to look at Food Safety and Genomics first, and then Animal Safety second. Within the Animal Safety, I want to increase our exposure in the companion, because that's faster growing than production. Now they're all great businesses as we shown this year, right? All the businesses grew double-digit. So they're all great businesses. So, it’s kind of like picking your favorite child. You don't ever talk about it in public, but you have to do it sometimes behind those doors. So, that's kind of what we look at is. We love all the businesses we're in, but that's where I would say our focus.

[David Westenberg:]

Thank you.

[Operator:]

The next question will come from John Kreger with William Blair. Please go ahead.

[John Kreger:]

Hey, thanks. John, can you maybe -- I know you guys don't give official guidance, but could you maybe just sort of step back and talk a little bit more about key priorities and goals for fiscal 2022 since that's just getting started? And also, what you think the key headwinds are? You talked a lot about supply chain, for example, do we expect those headwinds actually get worse, or just a question of when they might start to ease a bit? Thanks.

[John Adent:]

Sure. Thanks, John. So, I think for priorities, it's continuing the momentum we have, right? And even though we were in a very difficult environment last year, you think about it, we've launched very significant products and platforms with our AccuPoint NG and our Soleris NG in a COVID environment. We had a lot of discussion about, do we do that because we have to meet customers face-to-face to explain the benefits of this. And the team did it in a very challenging environment and did a great job. And we have great acceptance. At the same time, we continue to invest in new product. So, we've got new stuff coming that is a priority. So, it's really driving -- continue to drive market share gains and adoption of the things that we launched this year and the new products that we have coming. And so, we're really excited about what's coming down the pipeline and that's going to be our focus to make sure that we continue growth. We've done a nice job. I think if you look at some -- where some of our competitors have reported for the last quarter, our growth is significantly higher. So that tells me we're taking market share on the Food Safety side and the Animal Safety side, which is where we want to be. We like being in growing markets, but we also want to continue to grow faster than the markets. I think the headwinds are going to be -- last year headwinds were on customer shutdown. And how are you going to sell? I think headwinds this year are going to be in the cost side. Like Steve talked about with supply chain and Steve talked about another one, that's going to be a challenge, which is headcount. I mean, it is a -- it is challenging now to find hourly workers for the plants and the jobs that we have. And I think everybody knows the reasons why that is. And I won't get into any discussions about that, but it's just been a challenge. So, we've had to be very aggressive. We've had to be very creative. It hasn't caused any -- we've done a great job. Our operations team has done a fantastic job. We've had no back orders or shortages because of that, but it is something that we're battling every single day and trying to find employees and keep jobs filled. So, those would be the two major headwinds and also our objectives.

[John Kreger:]

Great. Thank you. That's helpful. Steve quantified the freight hit in the fourth quarter. I think you said $700,000. Curious, do you think you're losing out on any sales due to stock outs and delays as well?

[John Adent:]

I don't think so. I mean, we watch that really closely, John. I think what will happen is, we're going to end up on some of our lower margin products that are freight intensive. We're going to raise the price and either we're going to make money at it, or we're not going to sell it. That's how that's going to work.

[John Kreger:]

Make sense. Okay. And then one last one. A year ago, John, you talked a lot about the pressure on the institutional side of the food service business, really kind of hurting Food Safety. Where do you think that is now? Is that sort of back to normal, or do we still have an opportunity to see a ramp in demand in the fall is -- kids go back to school and maybe conferences are back?

[John Adent:]

Yes, you are correct. I think it's come back really nicely, but I think there's more upside there. And again, it's -- that comment is specifically around North America, around the U.S. When we look at kind of where we are within this pandemic across our businesses, we're in a lot of different stages and a lot of different countries. So, I think we're just starting the opportunity of opening up and seeing some of that business come back. And we see that with our internet sales are up or e-commerce businesses doing really well. And that's kind of what shows me the leading indicator of those smaller customers are coming back. They're starting to buy again and you saw it with our allergen test kits. That was a nice bump for the quarter.

[John Kreger:]

Great. Thank you.

[John Adent:]

Thanks, John.

[Operator:]

The next question will come from Mark Connelly with Stephens. Please go ahead.

[Mark Connelly:]

So, John, I was hoping that you could talk a little bit more about the growth drivers in your animal genetics business outside of companion animals. Curious where in a year and a couple of years ahead think -- you think the growth is going to be there? How important issues like ASF and plant-based meat are versus productivity in animal health?

[John Adent:]

Yeah. Mark, I think that when you look at the growth drivers in production animal, a couple of things that stand out. One is the adoption, right? We still have a tremendous opportunity to increase our customer base with adoption in beef and dairy. And we've talked about this in the past, right, about how -- we do very, very well with seed stock producers who understand the value and the traits they're looking for. But as we start to go farther down the food pyramid and we start getting into more commercial growers, kind of what we're doing around the cow, calf producer, the dairy producer, and then even going deeper into the feedlots, that is a big, big opportunity for us. And we're just now just really scratching the surface on that, because it's more of a blend of phenotypical and genotypical data to make sure that you can take the genotypical traits and use -- make decisions around phenotypical around feeding and environment to produce the best outcome. So, those are the things that really get us excited about production agriculture within the segments are we're already in. Secondarily, like we talked about with the agriculture business, that business is up very nicely and we see a tremendous amount of opportunity with our new shrimp test or whiteleg shrimp test, which we think is going to be very, very big. That's going to help us grow in regions of the world where maybe we're underrepresented. I mean, if you think about Southeast Asia, that's a market that we need to do. We have opportunities for growth in, and we think this could help be the platform for us to really drive the Neogen story into some of those markets. So, we think there's a tremendous amount of upside. And I also think, companions are too -- we continue to see that as a growing market and we've got opportunities around that genomics business and it's something that we're focused on and things that we want to continue to invest in.

[Mark Connelly:]

You mentioned the Nebraska lab. Do you get to a point at a facility like that where you have capacity constraints or reinvestment needs that are significant?

[John Adent:]

Yeah. We just expanded that facility. We spent quite a bit of money over the last couple of years increasing the footprint. I think we almost added 50%. We may have doubled that facility. We doubled that facility in size over the last two years. So, that's the thing that's challenging with Neogen as you have to stay ahead of your growth curve. So, we have to keep building and investing to make sure that we have the facilities to continue to grow. And we've done a really nice job of doing that so far. But yeah, we always look at that. I mean, I don't think it's so much from a -- I don't think it's as much as a footprint or equipment issue. It is labor. So, we're looking at what are other things we can do? So, we have -- with our growth, we have now genomics labs in China, Scotland, Australia, Brazil, Canada. And what we do is we say, okay, where can we were before? A lot of that stuff was flowing into Lincoln, because we didn't have opportunities. Well, now we can offload that into those labs that are more local, which increases the capacity of Lincoln, which allows us to grow more internationally. And we see the exact same thing. We just did a recent promotion of a team member in Brazil, where she was running our genomics business in Brazil. Now she's taking over all of lab time, which means she's going to be coordinating our efforts in Chile, Uruguay, and Argentina and Mexico, which is going to allow us to leverage that lab better in Brazil. So, those are the things we're doing to make sure we stay ahead of our growth curve.

[Mark Connelly:]

Super. Just one question. One of the big protein producers is having a significant listeria problem right now. I wonder how that affects your marketing program. Do you tend to see a surge in interest after stuff like that? I mean, obviously, you've got a lot of functionality and other stuff that's more important to longer term, but I'm just curious how it affects the short-term.

[John Adent:]

We do. And no, listeria is a key basis. I mean, any pathogen, Mark, that's going to kill people. We want to make sure we can protect the food supply on. So, we do see that because all of a sudden, sometimes -- everything's good until it's not, right?

[Mark Connelly:]

Right.

[John Adent:]

People are going along and like, oh, it's been good, it's been good. And then they see a competitor have an issue and everybody kind of says, oh, we need to -- let's do a couple more audits. And let's talk to the agent about their analytics platform. So, we can put that in so we can get real-time data on an hourly basis to make sure that we're meeting the needs of the government and our customers and putting the safest food out there we can.

[Mark Connelly:]

One last question. Are there any parts of this inflation that you're fairly confident are permanent as opposed to the temporary stuff like maybe freight?

[John Adent:]

I don't know. I think back when fuel prices were high, what was that seven, eight years ago and all those carriers put in a fuel surcharge and then fuel prices dropped by 50%. And gosh, for some reason there was a fuel surcharge still in there. So, I don't know. I'm skeptical, right, around their ability to lower prices. So what we need to be is we need to increase our efficiency and that's what we look to do is what are the ways we're going to increase efficiency to make sure that in a rising cost environment, we can leverage our size and scale to continue to be more efficient than everybody else.

[Mark Connelly:]

Super helpful. Thank you.

[John Adent:]

You bet. Thanks Mark.

[Operator:]

Our next question will come from David Westenberg with Guggenheim Securities. Please go ahead, sir.

[David Westenberg:]

Hi. Thank you for taking the follow-up. I just want to dive in. You had a lot of great commentary in terms of where kind of the cost inflation is. You mentioned labor as a component. Do you feel comfortable with -- over maybe the next couple of years to add pricing in excess of maybe labor inflation, or if you think maybe relative to competitors, how do you feel with where your labor inflation is? Are you kind of probably just kind of equal the industry? I traditionally think of Neogen as being a very lean, strong operating company. So, I'm wondering if -- you would have any differences relative to your competitors in terms of the labor cost component.

[John Adent:]

I think we are lean. I think we do a really good job of controlling our operational expenses. As Steve talked about we did investment spend in our leadership group this year, which I think is already paying great dividends, right? So, we added the Chief Commercial Officer. We added Doug Jones. We added Amy Rocklin as our General Counsel and both of them an outstanding contributors. So, we see that as an investment spend for growth, because they're going to help us drive growth forward. I think we continue to -- I don't think we're out of the market on the way that our costs are. And I do think that pricing is a function of a lot of things. I mean, we're bringing new technology, that's very valuable and that other people don't have that allows us to show a lot of value to the customer, which in turns allows us to have a lot of value in pricing. When you have more commodity type products, which some we have, we have some steel type products in our instrument type business on the Animal Safety side. It's a lot harder to do premium pricing in those. But in our core businesses, we are the market leaders, we are the technology leaders. We feel that we differentiate quite well against everybody else and we're leading the pack, which allows us to build a lot of value for our customers and take a little bit of that value for ourselves.

[David Westenberg:]

Great. And then maybe for the last -- my last question before I hop off would be, five-year outlook for Soleris in terms of a growth rate what you see, it sounds like a pretty promising new product. And just as it sounds like it would be margin accretive particularly, and it's consumables, but I just want to confirm that that would be a margin accretive growth area. Thank you.

[John Adent:]

Yeah. It's a margin accretive growth area. And we're pretty excited about that technology and even, the way we're growing into what we would consider not food, because cosmetics is basically not food, but it is safety. And so, we've got other markets that were growing with that product line that we're pretty excited about. So, we're going to keep pushing that. Thanks everybody. Chuck, is that it?

[Operator:]

Yes, sir. This will conclude our question-and-answer session. I would like to turn the conference back over to Mr. John Adent for any closing remarks. Please go ahead.

[John Adent:]

Yeah. Thank you, Chuck. I think, as you saw from our press release and the tone that Steve and I comments, we're excited about the year in front of us. Once again, Neogen's diversity in our portfolio and our markets has really shown the strength of the company going into this post pandemic marketplace. So, we're really excited about where we're going to be for the future. I appreciate all of you being on the call today and supporting us, and I hope you have a great rest of the day and we'll talk in September.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.